2020 Payroll Taxes Will Hit Higher Incomes

Please note that all such forms and policies should be reviewed by your legal counsel for compliance with applicable law, and should be modified to suit your organization’s culture, industry, and practices. Neither members nor non-members may reproduce such samples in any other way (e.g., to republish in a book or use for a commercial purpose) without SHRM’s permission. To request permission for specific items, click on the “reuse permissions” button on the page where you find the item. Those in a certain tax bracket ($137,700 as of 2020) are not required to contribute towards Social Security. The exemption does not apply to Medicare and those in the higher tax bracket are still responsible for paying the Medicare tax.

  • There is no limit on the amount of earnings subject to Medicare (hospital insurance) tax.
  • The program is funded by payroll taxes paid by the employees with matching contributions from their employer, and also self-employed individuals.
  • The rate on that tax would be 7.4%, with a matching 7.4% obligation for employers.
  • The State Unemployment Tax Act (SUTA), quite similar to the FUTA tax, is to fund the state unemployment program that benefits people who lose their job.
  • The total bill is split between the employer and employee, with each party paying half.

Those that are self-employed can pay this when they file estimated taxes quarterly. You will be able to take advantage of this whether you itemize your deductions or take the standard deduction. It’s important to realize that FICA does serve a purpose and that it is funding federal programs that you will most likely utilize one day. Make sure that you keep up to date with any changes in the FICA system with your HR department. Create pay stubs with accurate tax calculations with 123PayStubs.

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No taxes are withheld from the employee paycheck towards FUTA tax. Some people are “exempt workers,” which means they elect not to have federal income tax withheld from their paychecks. Social Security and Medicare taxes will still come out of their checks, though. Presidential candidate Sen. Elizabeth Warren (D-Mass.) would go a step further, proposing a new payroll tax on wages above $250,000.

Sanders suggests keeping the existing 6.2% rate for the Social Security tax, essentially reimposing the total 7.65% in FICA for high-income earners. Even if FICA is listed as a single line on your paycheck, there are actually two separate calculations that go into coming up with the amount of tax withheld. One corresponds to Social Security’s rules, while the other incorporates Medicare requirements. The process of wage base limit is a little different for the self-employed as they act as both employee and employer. The additional Medicare tax should not be confused with the alternative minimum tax on high incomes, which does not involve mandatory payroll withholding. To learn more, see the IRS webpage
Questions and Answers for the Additional Medicare Tax.

Starting Jan. 1, 2020, the maximum earnings subject to the Social Security payroll tax will increase by $4,800 to
$137,700—up from the $132,900 maximum for 2019,
the Social Security Administration (SSA) announced Oct. 10. The
SSA also posted a fact sheet summarizing the 2020 changes. Those that are self-employed will want to be diligent in calculating as well. The other habit to form in your business is keeping track of the FICA percentages and accurately tracking your business expenses and income. Paying quarterly is a wise choice and keeping your expenses organized between each filing is imperative. Every time you get a paycheck, your deductions will have been automatically made through your employer’s human resources department.

An additional Medicare tax rate of 0.9% is applicable to the threshold amount mentioned. Monthly benefits are paid to these beneficiaries from the Social Security Fund. The funds to this program are raised primarily through the payroll taxes paid by the employer for their employees and self-employed individuals. For a Roth 401(k), FICA/FUTA and income taxes are deducted from contributions, while withdrawals during retirement are tax free. Social Security is financed by a 12.4 percent payroll tax on wages up to the taxable earnings cap, with half (6.2 percent) paid by workers and the other half paid by employers. The Federal Unemployment Tax Act (FUTA) is used to fund the federal unemployment program that benefits people who lose their job.

FICA Tax: Definition and How It Works in 2023

The SSA also announced upward adjustments in the Social Security earnings test limit. For those who collect Social Security retirement benefits before reaching their full retirement age, benefits are reduced by $1 for every $2 they earn over the earnings limit. The taxable wage cap is subject to automatic adjustment each year based on
increases in the national average wage, which last year rose by 3.6 percent. There are some demographics that are exempt from paying FICA, but the exceptions are not far-reaching or plentiful. For example, only a few religious groups, college students working a campus job, and some residential foreigners can apply for an exemption. The common rule, though, is that if that exemption is made then they cannot benefit from the programs covered by FICA.

Federal Insurance Contributions Act (FICA) is an act that mandates withholding of taxes from employees’ paycheck and matching that with an equal contribution from the employer to fund the Social Security and Medicare Program. This added tax raises the wage earner’s Medicare portion of FICA on compensation above the threshold amounts to 2.35 percent; the employer-paid portion of the Medicare tax on these amounts remains at 1.45 percent. Additional Medicare tax withholding applies to wages and self-employment income in excess of the thresholds in a calendar year. The tax rates shown above do not include
an additional 0.9 percent in Medicare taxes paid by highly compensated employees. Employers have to withhold taxes — including FICA taxes — from employee paychecks because taxes are a pay-as-you-go arrangement in the United States. When you earn money, the IRS wants its cut as soon as possible.

FICA Rates

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Make sure you aren’t overpaying or underpaying for FICA each paycheck. Provide the employee wage details and let your taxes including FICA taxes calculated automatically in a single click. Generate pay stubs for your employees easily with best-in-class features.

FICA, short for Federal Insurance Contributions Act, is a federal law that requires employers to withhold and remit a certain percent of an employee’s earnings to help fund Social Security and Medicare. The total 50% off logojoy coupons 2021 bill is split between the employer and employee, with each party paying half. The only boosts to FICA taxes recently have come from the rising wage base on which Social Security payroll taxes get imposed.

The new form is expected to include
major revisions designed to make accurate income-tax withholding easier for employees. Nearly everyone that works pays FICA because it is a federal tax, and the rates are eligible to change each year. It isn’t just enough to know what FICA is but to be able to accurately calculate your earnings.


Now that you know the percentages, you can calculate your FICA by multiplying your pay by 7.65%. Your employer is also responsible for paying half of the total FICA obligation. The taxes taken out of your paycheck for Social Security and Medicare are collectively referred to as FICA taxes. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services.

Thankfully, this is done for you without you having to think too much about it. The employer and the employee split the sum of these deductions 50/50. Between keeping an eye on any changes with the IRS, awaiting your W-2 or 1099 in the mail, and gathering everything to file, it’s easy to get confused. Seeing terms like “deductions,” “credits,” “W-2,” “1099,” “Gross Income,” and “FICA” can make your eyes blur. For instance, presidential candidate Sen. Bernie Sanders (I-Vt.) would extend the Social Security portion of FICA to earnings above $250,000.

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